Investment update with John Pearce – May 2025

Hello, I'm John Pearce, Chief Investment Officer. Welcome to this investment update.

Since I last presented in February, all the talk and action has been about Liberation Day. You know the day—2 April, when Donald Trump announced tariffs on all the US's imports. So today, I'd like to take a big picture look on how we actually got to Liberation Day, then talk about the extraordinary developments we've seen since that day, and finally, we'll have a quick chat about what I think would be a reasonable base case as to what we might expect for the rest of the year.

I will attempt a history lesson in one minute, and a picture tells a thousand words. I think this map of the world says a lot. What are we trying to depict here? Areas shaded in blue denote where the US is the larger trading partner versus China with the rest of the world, and red denotes where China is the larger trading partner. Have a look back in 2000, this is before China entered the World Trade Organisation—the US pretty much dominated trade.

Image 1: A world map where countries are shaded based on whether the US or China is their larger trading partner, as of the year 2000. The US is shown having a higher level of trade than China, and most countries are shaded in blue (denoting the US as their larger trading partner).

We roll the clock forward to today, and look how much it has changed. This is extraordinary. Here we have evidence of China emerging as a genuine economic superpower. It's very significant. It's really the first time since World War II the US has had a challenge to its position as the world's sole economic superpower.

Image 2: A 2024 version of the world map shown in Image 1. China has a higher level of trade than the US, and most countries are shaded in red (denoting China as their larger trading partner).

Trump's America doesn't like this. Trump holds China accountable for hollowing out America’s industrial and manufacturing base. Trump also accuses China of gaming the trading system and hence leaving America with its big, fat, trade deficit. That's pretty much what brings us to Liberation Day, or a big part of it anyway.

I'm sure we all recall the theatrics of Liberation Day. This is when Donald Trump resembled a game show host with his cardboard listing the countries and their tariffs. The construct of these tariffs was exceptionally basic, shall we say, and this is basically how it went. If the US is running a deficit with your country, it's self-evident that you are protecting your industries, and to settle the score, we're going to levy tariffs. But to prove that we're reasonable people, we're actually going to halve it, and we'll negotiate from there. That logic is laughable.

I run a trade deficit with my barber. I get a haircut, I pay him, and he doesn't buy anything from me. But it's not because he's running some protection racket, it's because it makes no economic sense for me to cut my own hair—just as it makes no economic sense for the US to manufacture a lot of stuff. The US has moved well up the value chain, and the US is far more prosperous for doing that.

So where are we now? Well, since Liberation Day, we pretty much have a backtracking of Trump's original position. Most importantly, Trump recently announced a reduction in tariffs on China from 145% to 30%. This is only a 90-day truce, and within that period it's hoped that both countries can negotiate an acceptable outcome.

Why has Trump folded so quickly? The Trump fans will say this is just ‘the art of the deal.’ I'm not buying that. I think there are two key reasons. Firstly, China's leader, Xi Jinping, was well and truly up for the fight. China, in quick order, announced their own set of tariffs and trade restrictions. I think it became pretty clear to Trump and his administration that their hand was nowhere near as strong as they originally thought it was.

Most importantly: the US bond market. Typically, in a crisis, what you see is a flight to safety—and the ultimate safe investment is US bonds. You typically see US bonds rallying in these situations. Well, the reverse happened this time around. US bonds actually sold off very quickly, and the US dollar also sold off. This is very unusual. Something about the bond market—the bond market can't be bullied, it can't be sacked, it can't be deported. The bond market cares for nobody, and it was basically saying, “Mr President, you've lost your marbles,” and the President, I think, was listening.

What about the share market? Well, this is quite extraordinary. In the immediate aftermath to Liberation Day, we saw steep falls in the share market with the key US markets down double-digits. But the more Trump folded, the harder share markets have rallied—to the point where markets are now trading above where they were on Liberation Day. This is despite the fact that no concrete deals of any substance have actually been done.

In terms of our option performance, I’m loath to put any numbers on the screen because as soon as I put them on the screen, they're out of date these days. But what I will say is that calendar year to date, pretty much all of our options are close to flat or in positive territory. Given that we're coming off two very strong years, I think that's not a bad result, but we have got a fair way to go in this year yet.

Before getting on to expectations for the rest of the year, I'd like to comment on a lesson that was once again reinforced. At the height of the chaos, we saw elevated member switching, which we typically do see. We have members moving from growth (or risky) assets to defensive assets, typically cash. They do this at precisely the wrong time because they tend to miss out on the upswings and the recoveries in the market.

On a single day, the US market staged an 8% rally—actually rated as the tenth largest one-day rally in US stock market history. You might be thinking “Well, when did those other nine days happen?” Take a look at this graph. Six during the Great Depression, two during the Global Financial Crisis, one during COVID. These rallies tend to happen at the worst of times. The lesson being, usually the worst time to sell is when the markets are gripped with fear.

Image 3: A chart showing the ten largest single-day gains in the US share market’s history, ordered by size. The most recent, a gain of 8% occurring on 9 April 2025, is the smallest of the ten. The largest occurred during the Great Depression.

What can we expect for the rest of the year? Obviously, the range of outcomes is enormous. My base case is that we are going to muddle through. In February, I made the point that we have had two really strong years, anything above a flat return would be a bonus—and it's pretty much my thinking still.

There are some real positives. One of the up shots of America's position at the moment is that it has stirred other countries into action. We've seen the likes of Germany and China stimulate their own economies, so we are likely to see more balanced global growth. Australia, well, we're doing fine—the Reserve Bank looks ready to cut rates, we have a newly elected government with a larger majority, so a strong mandate. That government—for better or for worse—seems very willing to spend lots of money propping up the economy but maybe that's a story for another day. So, things are looking alright on that front.

However, there are reasons to be cautious, and the main reason is that we actually haven't had a deal of any substance that's been cut yet. We remain in this period of suspended animation. More importantly, when a deal is finally negotiated between China and the US, I suspect that the US is still going to have a level of tariffs that we haven't seen for about a century. We might avoid a global recession. We might avoid the worst-case outcomes. The fact of the matter is that we've got sand thrown into the wheels of the global economy, so I expect that things will have to slow.

Another reason to be cautious—Warren Buffett, the greatest investor of all time, by the way, just announced his retirement at the ripe old age of 94. Since 1965, Berkshire Hathaway, his investment vehicle, has returned 20% compound per annum. What an extraordinary track record. What's the great man doing? Well, he's sitting on a USD 350 billion mountain of cash, so he's very cautious.

Does that give us reason to be pessimistic? Well, there's another way to look at this. That USD 350 billion, that's about 30% of his total portfolio. Buffett has 30% in defensive assets, 70% in growth assets. Does that ring a bell? It should. That's about the same allocation as our default, Balanced option. Maybe the greatest investor of all time is following UniSuper’s strategy. Then again, maybe not.

Thank you very much for watching.

This video provides general information and may include general advice. It doesn’t take into account your financial situation, needs or objectives. Consider your situation before making financial decisions, because we haven’t, as well as the PDS and TMD relevant to you at unisuper.com.au/pds, and whether to consult a qualified financial adviser. Past performance isn’t an indicator of future performance. Information is current as at 16 May 2025. Comments on the companies we invest in aren’t intended as a recommendation of those companies for inclusion in personal portfolios. Holdings are current as at 31 December 2024 and are subject to change without notice. Figures sourced from the relevant SuperRatings Pty Ltd FCRS or PCRS index December 2024, released 20 January 2025, and without taking into account subsequent revisions. Prepared by UniSuper Management Pty Ltd (ABN 91 006 961 799, AFSL No. 235907) on behalf of UniSuper Limited(ABN 54 006 027 121) the trustee of UniSuper (ABN 91 385 943 850, AFSL No.492806) the fund.